Two ways for cities to reduce the cost of housing and make homes more affordable

West Sacramento affordable housing construction (Mark Hogan/Flickr)

With the price of housing outpacing wages in California (as it has for years)—and with state leaders struggling to find new revenue sources for affordable housing development—it may be time to look at new ways to support housing projects, including ideas for dramatically reducing how much it costs to build them.

State revenues can—and should—be part of a housing solution, especially given the scope of the state’s housing crisis. The California Economic Summit recently shared a comprehensive housing plan with state leaders identifying a range of new revenue streams and tax credits that could greatly expand the development of housing close to jobs and transit.

The fact is, though, state tax dollars are limited, politics are politics, and there may be other, equally effective ways for Californians to accomplish their goals for sustainable economic growth, affordable housing, and environmental health.

Over the last year, the Summit has been highlighting the potential of a new model for supporting affordable housing: Instead of relying on the state budget alone to bridge funding gaps, this approach would 1) reduce regulatory barriers that constrain housing developers’ ability to respond to market demand and 2) use new local powers to finance housing-related infrastructure.

Thanks to the passage last year of SB 628 (Beall)—and to the passage of AB 313 (Atkins) this year—a platform is already in place to take advantage of these opportunities. California’s new Enhanced Infrastructure Financing Districts (EIFDs) allow local governments to bundle an unprecedented array of local funding streams—including the property tax increment powers once used by redevelopment agencies—and reinvest those dollars in affordable housing and other infrastructure.

1. Streamline the regulatory process for districts investing in projects that achieve state goals.

This effort should start with taking a closer look at how these districts interact with the California Environmental Quality Act. While no EIFDs have yet gone through the CEQA process, large investment programs of this sort are likely to be complex and require difficult and time-consuming environmental analysis, which will add to their costs.

To enhance their effectiveness, EIFDs actively financing projects that advance equity, environmental, and economic goals outlined in state policy—infill housing developments that reduce reliance on cars, for example—could be made eligible for environmental streamlining. This could be done through existing law by extending to EIFDs the shortened CEQA review the state granted to green mega-projects through AB 900 (2011).

This approach would need to be carefully constructed, of course, but the metrics already exist in many state laws. For example, in the sustainable communities strategies outlined in SB 375, emissions reduction targets are now required to be developed in regional transportation plans, along with fair-share housing targets. Transportation and housing plans are then assessed for their total impact on CO2 reductions. The law offers exemptions from parts of the CEQA process for projects that align with these regional plans.

The state could adopt a similar approach for EIFDs, offering streamlined environmental review if the districts show how their investments contribute to regional SB 375 goals. In addition to pledging to build affordable housing, for example, a district could outline plans—and sources of funding—for cleaning up contaminated groundwater and creating new water supplies, while also setting wage growth goals. Districts that demonstrated progress could then be granted streamlined review for their next projects.

2. Use an EIFD to finance developer fees and infrastructure costs—instead of adding them to cost of housing.

Another way to make housing more affordable is to remove a portion of the market price of many houses—including fees charged to developers by local governments and school districts for housing-related infrastructure, which are then passed along to the purchaser. According to the California Department of Housing & Community Development, these fees can add as much as 13 percent to the cost of a house. In the case of a $600,000 home, for example, that would add up to about $78,000.

Local governments could take on this burden, instead—but only indirectly—by using an EIFD to finance infrastructure costs now funded through these development fees. As these new districts can do with any other investment—from a transit station to a water facility—the EIFD would support expenditures or borrowing with revenues from long-term gains in the growth in the development’s property tax value.

In this way, EIFDs could also offer an alternative to Mello-Roos Districts, widely used local financing tools that allow cities and counties to add a fee to the property tax bills of homeowners in new housing developments. These fees, which can be over $2,000 a year, are then used to support infrastructure investment in the community.

EIFDs could provide communities with a new “third way” of supporting housing, in other words—one that reduces the market price of homes and broadly shares the tax burden, all without raising new taxes or fees.

A new funding approach for housing?

While the state would need to carefully draft any updates to existing law that provide EIFDs with a streamlined CEQA process, local governments already have the authority they need to use EIFDs to finance a portion of long-term housing costs.

Paired together, though, these approaches could have an enormous impact—rewarding local commitments to a range of state environmental and housing goals, while also accessing an untapped source of public revenue, attracting private investment, and encouraging collaboration across city and county lines.

And all without raising taxes. Or relying further on scarce state revenues to make homes in California more affordable.

Mark Pisano is president of the Southwest Megaregion Alliance and a professor of the practice of public administration at the USC Sol Price School of Public Policy. The longtime executive director of the Southern California Association of Governments, Pisano also co-leads the California Economic Summit Infrastructure Action Team.